COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 17.02.1999 COM(1999) 65 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL

CONCERNING THE EMPLOYMENT ASPECTS OF THE DECISION TO ABOLISH TAX- AND DUTY-FREE SALES

FOR INTRA-COMMUNITY TRA YELLERS

~ ..

COMMUNICATION FROM THE COMMISSION TO TilE COUNCIL

CONCERNING THE EMPLOYMENT ASPECTS OF.THE DECISION TO ABOLISH TAX-AND DUTY-FREKSALES

FOR INTRA-COMMUNITY TRA YELLERS ..

Introduction

The European Council in Vienna (11 and 12 December 1998), "ll·ith regan/' to the . decision of 1991 on tax-free sales for intra-community travellers" asked "the ·.Commission. and the Council (ECOF{N) to examine.hy March /'999 the problems ll'hich

could arisewith regard to ·employment and to address on the basis ofpropo~wlsji·om the . Commission possible means of tackling these problems, including the possihili~1' of a limited extension of the transitional arr,angements1".

In response to the Europea~ Council's request.; the Communica.tion proposes .ways to tackle the problems which the abolition of intra-EU duty-free salesz ··could crcat~. especially as regards possible job losses. It does so in the; context o~ the EU ·Strategy on employment. The Commission notes that a consistent policy to . make. nati~,)nal tax systems mo're employmerit-friendty·is now a declared objective of Me1nbcr States. This objective was recently reaffirmed by_the Vienna European Council itself.

The duty-free regime cannot be considered in isolation. Its existence impacts on ~mployment· not only in that .sector, but across the economy as a whole, because it .

. distorts competiti9n between retailers and between modes of transport. Indeed, duty free can be seen as a· test case of the credibility Of the EU's determination. to use tax co-ordination to fight harmful tax competition and hidd.en subsidies which put pressure on labour costs, and so reduce job creation. •

This Communication, in keeping with the Vienna mandate, l_poks chiefly at ways ·of dealing with. potential employment problems related to the abolition of duty-free sales,

· including the . possibility of a limited extension. On. the basis of this fmaiysis, the Commission considers that the <l,holition of duty-free sales will not have a significant lasting negative impact on employment overall. On the contrary, as with the phasing out of any distorting subsidy, short-term negative effects on employment arc expected to be more than offset by long--term effcctsonjoh creation.

2 1 . Point 24 of the Conclusions ofthe European Council. . ' .

In the remainder of the document, the term "duty-free sales" covers both tax- and duty-:free sales. . . . .

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1. Why were the 1991 and 1992 Council decisions taken?.

The creation of the Single Market meant the elimination of fiscal frontiers, so notions of importing aitd exporting disappeared within the, EU. ·As a result, EU citizens can buy goods in the Member State of their choice and pay tax on them only at the point of purchase. Despite universal recognitioq for the huge benefits of the Single Market, it was realfsed that in the short term the elimination of fiscaJ frontiers might hann, certain sectors.

The Council therefore took specific measures to help those sectors' to adapt: . . '

it established a training programme to help national administrations3 reorganise their customs operations and to exchange officials (the Matthaeus programme);

it launched a 30 MECU action programme4 designed to ret~ain and re-employ customs agents and allowed Member States to use Community structural funds (European Social Fund and INTERREG I) to introduce accompanying measures: 63 000 customs agents have been helped through these schemes;

it established, though decisions in 1991 (VAT) and 1992 (cxcisl' dutil'S), a transitional regime5·until 30 June J 999 to allow duty-free· shops to continue sdling a set allowance of goods exempt from VAT and/or excise duties to he controlled h~·

the vendor. This regime enabled-operators of ditty .. free shopping f~tcilitics to pn:p<in: for and adapt to an internal market without fiscal frontiers.

· 2~ What di_d the Single Market mean to the duty-free sector?

The creation of the Single Market and the abolition. of fiscal frontiers took away the possibility for ·an retailers to exempt or reimburse taX paid in one Member State when g~ods were exported to another Member State.

-> Commission Decision No 94/844/EEC of 19 December 1994. :! Council Regulation (EEC) No 3904/92 of 17 Deccmber'l992.

(~mmcil Dirt>ctivc 91/6RO/EEC of 16 December J!)C) I and Council Dircc!ive 92/ 12/EEC ni' ' ZS February I ')92.

But to limit the effect ofthis decision on certain retailers, the Council, as a transitional _ measure, -allowed Member States6 to exempt from VAT and/or excise duties goods

bought by people trav~llihg ~ithin the EU o~ board ferries, on aircraft, or at airports (the _ Channel Tunnel Terminals. were added later). All Member States (Germany ~nd

Luxembourg however, with some limitations) adopted this measure. There are no duty- . · .. free sales on- trains .or coaches within the EU. It should be noted that goods can only be sold duty-free up to a-certain value or quantity7• Very often-customers are not aware-that there is no duty-free on bigti~::ket items (anything over € 90 for example).

At Council level, a political agreement was reached on minimun1 standards of control to be observed by Member Statesx. A report by the Commission, reviewing this new control

· .. systcm9 showed that the systems put into place did not in all cases guarantee that the limits for the tax exemption are respected.

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3. · Characteristics of the duty-free sector

In gep.eral, duty_:_free shops benefit from attractive locations and a rdatively captive market,- thus enjoying a natural competitive advantage. The tax exemption adds · ~m important element of further,' artificial competitive advantage over 'other retailers and. other transport operators (by land or rail) selling goods on which tax is_ paid. Dut)'-frec thus _distorts competition not only between traders, but especially between modes of transport.·

. The tax exemption enjoyed by duty-free shops enables them to apply higher mark-~tlpS than is otherwise practised by the retail sector. Various price cort1parison surveys Hi show that, to the travelling consumer, the price advantage is often relatively small or even 11011 ·

existent. According to surveys, duty-free prices often exceed those of high street retailers. Even for excisable goods (alcohol and tobacco) where the level of the excise. -higher than VAT . in 'the niajqrity of cases, represents the highest potential for _lower · prices, the saving pas.~ed on to the consumer in mosLcases represents only a fraction of the tax. exemption. This can be substantiated when comparing the before-tax price· and

· the retail (after:-tax) price. Thus the tax exemption in fact subsidises profits of duty-free firms more that-it subsidises the demand for the products they sell. This must be kept in. mind when considering the possible effects ofthe abolition.

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7

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Article 28k of Directive 911680/EEC and Article 28 pfDirective 92/12/EEC respectively. See Table 1 of Annex I. · Guidelines for the co~trol of tax-free sales ip the Community, agreed by the Council o.f Ministers on 14 December 19~;12. · ·

9 . The vendor control report (COM(96) 245 of 26 July 1996). 10 . For example by the European Consumers Organisation (BEUC-study in 1994) and by the

Commission (December 1998) ..

3.

4. The duty-free sector in figure~ 11

( . I

According to figures available from the duty-free industry, the total 19~6 duty-free sales by EU duty-free shops situated at airports and ori boar<! aircraft and ferries amounted to € 5.8 billion, up from € 3.6 billion in 1991. Intra-EU duty-free activities represented 71% ofthe total (€4.1 billion) which is equivalent to 0.060% ofthe 1996 EU GDP 12.

The increase in sales- clearly indicates that, during the transitional period given to operators of duty-free shopping facilities to enable them to adapt their activities, the. industry has expanded its business.

Duty-free activities are typically grouped in three broad categories: airports, where intra EU duty-free sales amounted to € 1.6 billion (39%), ferries, with sales of € 2.1 billion (51%), and airlines, with sales of€ 0.4 billion (10%).

Traditionally, the products sold by duty-free shops_ are grouped into four separate categories: wine and spirits, tobacco, fragrances and cosmetics and miscellaneous. Looking at the figures from the duty-free sector regarding intra .. -Eu duty-free sales. "miscellaneous" with a turnover of € t2 billion accounted for 29% of sales. With saks of € 1.1 billion, wines and spirits represented a share of 27%. Sales of fragrances and cosmetics and sales of tobacco each amounted to € 0.9 billion which is 22% of sales for each group. In total, excisable products (i.e. alcohol and tobacco products) represented 49% oftotal intra-EU duty-free sales.

The duty-free sector itself13, based on 1996 figures, has estimated that duty- free shops and activities involve a total of 140 000 people. Since 70% ofsales are made on intra-Eli voyages, it can be assumed that around I 00 000 of these jobs are related to intra--Eli· duty-free activities. This is equivalent to 0.066% of total EU employment in 1996

As indicated in Annex I, sales per employee ~n the retail trade are € 146 000. HowcYcr. sales per employee in the intra-EU duty-free sector are, based on the above figures. only € 41 000. This implies either that there are, in fact, less people employed in the duty-free sector or that the figure of 100 000 includes people not directly involved in sales activities. ·

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12 See Annex I. It should be noted that this indicator overestimates the size of the sector since the sales (tmnover; include the value of the input from other sectors to the duty-free business (i.e. the merchandise). The value added by duly--free activities can be estimated at around 0.02%1 of GOP.

Thl' European Travel Rcst.~;.m.:h F1H111dation (ETI_H'). The organisation was created in 1995 b~ the duly lrcc industry: It has JO members repre~enting duty .. free shop opcrato;:. and pmdth:<:n~ an,~· · distributors of products !or the duty-:fr..:e markcL ·

-!_

·It is difficult to allo-cate jobs per product category. Given'that excisable products (spirits and tobacco) represent 49% of total intra.::.EU duty-free sales14, it is people working in this category who might be affected the most by the abolition. However, it is likely that. fewer people are employed pro rata for sales of wines, spirits an4 tobacco than for sales or'miscellaneous goods for which larger selling spaces exist ·and more sales assistance is nee4ed.· · ·

5. · What impact might the 1991 and 1992 Council decisions have on empDoymeiDt'!

In order to examine the employment impact of the Council's decisions· to abolish intra -EU duty-free sales, the framework of any potential employment impact must be properly established. · · ·

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S.l. According to the industry

. -

The duty-free industry estimates that, following the abolition of intra-EU duty-- fr~e

sales, the direct impact on employment is 50 000 affected jobs. When including th~ - potential indir~Ct impact on employroent, the sector estimates that as much ?S 140 000 . jobs might be affected's. This would be the result of lower sales and lower prLilits.

forcing transport prices higher, dampening demand and leading ·to job losses in the : transpprt sector. Ultimately tha:t could have. adverse effects on intermediate or_ capital

products (e.g. shipyards). '

The aggregate estimates are based on industry-commissioned studies that make use of .different methods and assumptions. These estimates are arrived at by additig up the country specific figures, which include all possible negative factors, while disregardiltg positive employment effects taking place . in duty-pajd retail outlets. independent stl,!dies16 indicate that this methodology overestimates the figures for jobs affected.

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15

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\

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Sec Tahlc 4 of Annex i. International Duty Free Confederation (IDFC) and Association Francaise de Commerce Hors--;l'axcs · (AFCOHT), Contribution of Duty- & Tax-Free Sales to the EU and its citizens, September i 997. A study carried out by lnstitut Fiir Wirtschaft of Munich ~n the European Internal Market and the system of duty-free arrangements (IFO Financial Policy Studies 68, 1998) considered that in most of the studies conducted by or on behalf of the duty-:free sector, the employment impact had been overestimated; · ·

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5.2. According to Member States.

Nation~l studies earned out by five Member States confirm that the abolition of intra-EU duty-free sales would not impact on employment levels overaUI 7. According to these studies, the impact on e~ployment is likely to be of a specific and local nature, mainly in the maritime sector.

1o explore this further, the Commission asked Member States to provide any information that would help identifying the scale and scope of local employment problems. It has received information from the national administrations of all Member States 18

. corroborating the view that there would not be an overall impact . on employment following the abolition of intra-EU duty-free sales.

5.3. . Evaluation

Firstly, it should not be forgotten that the abolition, on 30 June 1999, only applies to intra-EU duty-free sales, and travellers departif}g to third country dest-inations will still be entitled to make duty-free purchases.

Equally; the abolition of duty-free sales will not affect EC provisions conceming ship stores, which allow Member States to exempt from VAT and excise duties suppl ics of goods for consumption on board. This is particularly important in the case of cruise lines.

Employment( in' the. duty-free sector consists primarily of jobs in the transport or reiatcd industries which only partly depend ori duty-free sales. The growing demand for transp<;>rt services is· not likely to be significantly affected by the abolition of duty-free . . since most people travel because they need to. It is only in the maritime sector where, in addition to genuine travellers, there also exists a category of peopl~ who travel h.1

purchase. However, even the one-day ferry' excursions are often not solely purchased for duty-free reasons, but in order to shop in Member States with lower excise duties.

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II!

Denmark: Report on the assessment of the consequences of ending duty-free trade for visitors between Denmark and EU countries 1 July 1999, December 1997, the Ministry ofTaxation. · France: Report to the Prime Minister on the abolition of duty-free sales iil Europe: Impact and proposals, 23.7.1998, drafted by Mr Andre Capel, Deputy for the Pas-de-Oilais (France). Ireland: Report on the impact of abolition of Duty Free and Tax Free sales for EU travel in 1999, March 1998, KMPG Management Consulting· in ·association with Fitzpatrick Associates and MDS­Transmodal, commissioned by the Department of Finance Sweden: Report on the consequences of the phasing out of tax-free selling in the EU (Government Official Report), 25 Mar~h 1998, the Ministry of Transport and Communications. llnitcd Kingdom: Study into the economic consequences of abolition of duty fi·ee allowances within the EU, 1998, the Department of the Environment, Transport and the R~gions. · See Annex II.

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Moreo~er, it must not be forgotten that duty-free sales often enjoy economies of scope, i.e. the same worker is allocated both to normal transport related activities and. to selling duty-free_products, and in fact in several instances, like in the case <;>f flight attendants, safety regulations and not sales productivity determine their numbers. For most travellers the possibility of duty-free purchases is only a~ ·additional attraction. While waiting at the airport or spending time on the ferry, shopp~ng is one of. the prime ways to pass the time, and that is likely to be the case even after the abolition of duty-free sales. . .

This is confirmed by the experience of US airports, where duty-free sales hav~ never -been allowed for intern·al flights and where nevertheless there is a huge--and growing market This is confirmed by the expansion <;>f ordinary shopping malls in airports, as the result of a growing demand . from travellers, which have· attracted international investments, including from European duty-free operators .

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For all these reasons shopping will continue to exist after the abolition of duty-free sales_ and ~ales assistants, shelf-stockers, etc. will still be needed. For many products sold in · duty:....free shops the unique selling position ofthe outlets must be considered a factor. the difference between some prices duty-free and·tax paid is often very smalL Tl1is supports the idea that the reason for travell-ers' purchases is not necessarily the price advmttagc hut to a large extent the comparatively favourable loc.;tioi-l of duty-- free shops or the attraction of the product itself (e~g. smoke_rs will riot quit just because they will no longer

:be- able to buy their cigarettes duty..,.. free). Consequently; a sizeable impact on the aggregate sales of the goods concerned is not to be expected, since the total final demmlli

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will be simply~re-oriented to normal outlets without decreasing in totaJ1 9 • It is thercforl' unlikely that the abolition will have sizeable negative employment effects on tlw production side even in' the short term,

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It is true that the demand for these goods. has been steadily falling while their after-tax prices - increased over the last tw:o decade~. Still, high excise duties only explain a marginal part of the trend.

Changes in social habits and tastes, as well as health considerations have been the major drivii1g ftuc~s reducing the demand for wines, spirits and tobacco.

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It is however acknowledged that some specific .ferry lines might be affected. It is clear that ferry services depend more heavily on revenues from duty-free sales than airports and airlines. The information available to the · Commission seems, fo indicate that a number of ferry services might be reduced or closed following the abolition of duty-free sales. Examples include the connection all the year around between two INTERREG­regions in the· northern part of the Gulf of Bothnia, certain short-distance services between Germany and Denmark and at the least one service between Ireland and France. For these three specific examples, the direct employment loss can be estimated at up to· 100 jobs. Whilst this suggests that there could be significant effects elsewhere in.the ferry sector, the total effect on the sector as a whole is, however, likely to be more limited . because the frequency of a majority of ferry services will not be substantially affected by the abolition of duty-free sales.

<ll>

Conversely, the employment reduction in duty-free outlets would be compensated by a corresponding increase in ordinary shops, whose organisations have complained to- the Commission about t.he present distortion of competition.

The Commission has calculated that in 1996 the duty-free regime· co.uld have cost Member States up to € 2 billion In lost tax revenue. Taking into account the difficulty of calculating t~e real excise duty at stake, even on the most conservative estimate the lost revenue in 1996 would have been at least € I billion. This lost revenue would of course be higher today. It is effectively the European tax-payer who finances the duty -free exemption. If this money were instead used to reduce the generally applied levels of indirect taxation, consumption would increase and a net creation of new jobs could be expected.

In this context, the Commission is submitting to the Council a proposal on the possibility of an experimental application of reduced VAT rates to labour intensive services This is an instrument to convey in support of employment the tax receipts deriving from the abolition of duty-free sales. ·

This positive effect would be even more significant if such revenues were used to finance a reduction in social security contributions targeted at relatively unskilled and Jow-paid workers, in accordance with the proposed Employment Guidelines for 199920. The phasing out of duty-free sales could thus lead in the tonger term to net job creation if the revenue were used to reduce the tax burden on labour. Previous experience and published simulations by the Commission departments show that targeted reductions of non-wage labour costs in the order of € 1 billion could lead to a· net creation of the order of 20 000 new jobs2t.

20

21 Proposal for a Council Resolution on the 1999 Employment Guidelines, 18 January 1999. OECD ( 1997) Taxation and ·Economic Performance. European Commission (1994) European Economy No. 56.

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Alternatively, Member States could use this amount to consolidate public finances, as reiterated by the Council in the Stability and Growth Pact and. in the Broad Economic Policy Guidelines .

. It is clearly a rriatter for individual Member States to decide. which of these courses to . -follow. However, in -the long term, __!he combination of these effects - movement of_ demand from duty-free shops to high street shops, change from a· tax exemption to a n!duction- in non-wage -labour costs,, consolidation of public fi_nances - would outweigh the short term job 'tosses. ·

In conclusion, the analysis suggests that unemployment effects will be.time-limited and _ ·confined to specific geographical and economic sectors, while in the medium term net

employment gains can be expected.

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6. Policy action

6.1. Extension of the transiti~nal period

An extension of the transitional peJ:"iod, allowing intra-'Community duty--free ·saks ·ll1.

continue beyond 30'June 1999, could take seyeral forms: '¥1 extension for· a pcrit1d of· -'time to be· determined, or limited to certain sec_tors, or limited to certain products: Certain . general considerations apply to all these variants. -

Th~ extension of duty-free would prolong. discrimination between comparable transport modes (i.e. air, sea and rail link:s between Member States w~thout intermediary calls). Only air and sea transport benefit from the duty-free arrangements, rail transport is· excluded from the scheme, while road transport has no access to it.

There is a genuine risk that operators who are adversely affected by distortion of competition caused by duty-free sales would- chalfenge before the Courts the mlidi~r of any extension of duty-free. The recent Eurotunnel case22 clearly demonstrated that op=erators may well challenge the validity of E(' provisions before the European n1urt l'lf Justice, in particular in the framework of an Article 177 preliminary ruling. Bodil'S with

. vested interests have already expressed their intention to challenge before the Court any prolongation·ofthe duty-free regime~ - ·

Any new proposal by the Commission would need to take _into account the -state aid rules. Allowi_ng sales of goods without imposing the VAT and excise duty nonnally due constitutes an economic advantage to the beneficiary of this privilege which; in the case of duty-free, would include professional operators, and transport enterprises. -The duty­free privilege could therefore be considered as an operating aid which the Corrimission would have to evaluate according to the Treaty. . -

22 Case C--40HN5,judgcmcnt ot: II November 1997.

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There is a risk that any extension would be inconsistent with El! policy in other areas, e.g. health policy by encouraging access to low.:...priced tobacco and alcohol. It should be· noted that if': terms of turnover generated by duty-free sales, alcohol and t<;>bacco account for about one half.

Finally, options for an extension share ·another important characteristic. Ins~far as they constitute a prorogation of a transitional period set by a Council ~ecision, they have an influen~e on any provision of Community legislation based on the credibility· of ·1

·:

transitional periods. Within ·the specific taxation domain, the credibility of important elements of the Community policy, addressed, among other objectives, to the orientation of taxation system in a more employment friendly way, would be put at risk. In the specific case ofthe Code of Conduct on business taxation, whose mechanism hinges on :.t

political commitment of Member States to roll back within a set lim!t of time on the' measures de~med as harmful by the Council, the further prorogation of a much longer implementation period of more than seven years set in a legally binding way through· a Directive would undermine the whole engagement. ·

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In addition to the above, specific considerations apply to the diffcrc1tt limns that ·might. he takeri by an extension of the transitional period.

1. A time-limite(/ extension

One possible option could be to allow duty--free sales to be maintained tor a time .limited, . period. In the short term (a period of six months or a year has been mentioned). extension would have no real and persi.stent impact on employment because it would not, by definition, enable effects to be spread over time .

.A further extension risks sending confusing signals to the duty-free industry. BelicYin~ that yet further extensions may be subsequently possible, operators could delay making the necessary adjustments. In the longer-term, this could exacerbate any employment problem. The evidence of the last seven years suggests that, for perfectly. justifiable · commercial. reasons, the operators in the strongest position would seek to develop the market to increase profits, while those facing difficulties could be tempted to postpone inevitable structural adjustments.

Furthermore, this option would only address possible sectoral employment difficulties if th~ duty-free industry uses it 'to truly prepare for the abolition. If not, this would lead to

· . an aggravation· of some of the structural problems of the sectors concerned: · · · ··

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2. An extension_ limited both in time and to certain sectors (e.g. the ferries).

Given their specific features, the different branches of the duty-free business are not equally affected by the abolition of-duty-free sales in the Union. One possible option could therefore be to allow duty-free sales to be maintained7 for a limited period, only by the ferry operators; since their business is more heavily dependent on duty-free sales than the airport~ and 'airlines. whilst having the advantage of a more targeted, limited approach, .this would however, by definition, constitute an even greater breach of the

/-, principle of equal treatment and would reinforce any differences in treatment between modes oftranspoit. ·

Commissi<?n guidelines for state aid in . the maritime sector already provide the _framework for"' the support of fe:iTy links by Memb~r States. These guidelines are restrictive since they give consent to operating aid only in exceptional circumstances where services are .subsidised within a public service contract. Member States mitst normally conclude open-tender contracts .for links deemed essential. But, if a Mcmh.cr State were to consider that support were necessary to maintain essential links. these gui~eli!les would have. the advantage of Jransp_arency and wm;ld avoid the ~ kgal uncertainties inherent in the prolongation of duty-free exemptions.

In . conclusion, ·whilst. ·this second option . wo~tld be more targct.Lxl. it would. in · consequence, further aggravate the currently existing distqrtions. Moreover. it wmild lmly address possible sectoral employment difficulties if i1 were to be used to truly prepare for· abolition a.Ild could also contribute to an aggravation of the sector's structural difficulties.

3. ·A progressive introduction of excise duties (on alcohol and tobacco) and immediaTe applicatiC!n ofVAT . .

...__

This option was put forward in a French study published in July ·J9982J. This approach suggests treating VAT and excise duties differently when. abolishing ·duty-free .sales. In ·

- the solution proposed,' VAT would be applied from 1 July 1999 and excise dutie-s . phased-in in. thirds until they reach the average;! European rate (for tobacco and alcohol).

'-.

B~tween then and a future date, excise duties would be harmonised or,. if harmonisation could not be achieved, raised by each Member Stat~ to ifs normal riational rate. It is h<~sed ori .the· assumption· that the advantage ·for the consumers, in .. tem1s of VAT. is fairly lirnit~d, because only goods 'worth less than € 90 are exempted from VAT under the duty-free regime (e.g. there is no tax exemption for high priced luxury goods such as cameras). · · · .

The pot~ntial attraction of such an app"roach is that it will li.)rcc'thc ()pcrators to make a gradual-adaptation: However, technically it would be very diffi'cult to implement not least because in the same fiscal territ<;>ry there would be two. separate rates.

23 · .Report to the Prime Minister on the abolition of duty--free sales in Europe: Impact and propo!)als, 23.7.1998, -drafted by Mr Andre Capct, Deputy for the Pas--de-Calais {France). ·

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Moreover this option would contradict the general principle laid down in Community excise legislation that only one rate may be applied within a Member State. If a first exception to t~is principle were made, it would give rise .to pressure for applying reduced rates in other areas, especially in frontier regions. It would also mean that. operators would incur increased administrative costs as ·a result of the gradual adaptation required.

Finally, this option does not resolve the problem of unequal treatment of comparable modes of transport nor are the benefits in terms of employment particularly obvious since the alcohol and tobacco sectors of duty....:. free sales are less labour-intensive .. ·

A slight variant of this option would· be to introduce VAT immediately as abeve, but to introduce excise duties in just one step at a later· stage. This would be 'technically easier. but does not have the attraction of the gradual approach. Moreover, it could implicitly res11lt in an unlimited extension of duty-free sales, as unanimity on rate harmonisation would be dif~cult if not impossible to reach.

6.2. Action to tackle specific employment problems

This approach has the great advantage of directly tackling t~e central problem raised by the European Council in Vienna,_ namely the possible effect on employment of the abolition of intra-EU (luty-free sales. The Commission · stitff working paper of 20 November 1998 (SE~(1998)1994) sets out the general framework. in which' Community instruments can be employed in these circumstances.

1. Within the framework of existing Community instruments

· . Within this framework and under existing procedures, approJ;riatc rcspons~·s could'ht' found to· problems of a local or regional nature. Both the national studies and independent studies concluded that the abolition of duty-free sales would not have any macro­economic ·impact and that any impact at micro-economic level would be of a limited regional or local nature.

It would-be coherent .to pursue.a solution that would fall withincthe.:frameworkof existing CommiD.Iity policy objectives- to·. target . any local, regional or social ·problems that · " Member States' may identify.

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Structural Funds

_As has been pointed out in the Commission working paper, the Structural Funds can help to alleviate economic and social problems that certain regions might encounter following the abolition. For example, the European Social Fund finances vocational training. for persons threatened with unemployment anywhere in the Community (Objective 4). The· current, programming period for the Structural Funds. 7xpires at the end of 1999. Examination of the status at I January 1999 of financial programming for all the Structural Funds over the current p~riod (1994-1999) suggests that Member States sti II . have significant rooni for manoeuvre to cover measures that would help absorb possible consequences of abolition. Some of this could inyolve measures already planned under the programmes, but it is expected ·that there is also room for some reallocation o( funds to additional -activities "specifically aimed at remedying the regional and local consequences of.abolition24 . _

To date, Memb~r Stfl.tes have not requested any action to be taken. The Commission will nevertheless give favourable consideration to any request made before the end of this -. year by a Member State or region for measures of that nature to be ·included ii1

programmes currently being implemented. Because the· current programming lkril1d expires at the end of 1999; it should be emphasised that.the de.cisions the Cmhmissilm will have to make following such requests will also need to be. tal:<.en bef~re 31 Decembct· 19g9 ..

' . ' . The next programming period, which will run from 2000 .to 2006, offers th~ advantage of allowing t~e Member States and- regions concerned more. time to propose structural measures to alleviate a~y economic and social dilficulties arising at regional or· local

-/ level. J\J.easures of this nature could -be proposed by way- of Keneric_assistance (the new Objectives I,. 2 and 3) and under the INTERREG Ill Initiative. Regions in which economic activity is heavily dependent on duty-free sales but which are not eligible f'or

. assistance under Objective I could be proposed by. the national authorities for support . upder Objective 2~ . . .

- · Cohesion Fund

As far as the Cohesion Fund is concerned, the Member States affected c~uld t~rget projects on port and airport infrastructures fulfilling the eligibility criteria of the Fund. · ancUn particular belonging to the TENs (Trans European Networks).

Within this framework, the Commission will give favourable consideration to any request made before the end of this year by. a Member State or region for measures tlf this nature . to .. be induded in · pr~grammes currently b~ing implemented. Since the current

. programming period wi II expire a(the end of the year, the Commission must he a~le to decide on any such requests before 31 Decemhcr 1999.

24 See Annex III.

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State aid

As discussed above, Member States wishing to grant state· aid in order to tackle local employment difficulties in the duty-free sector have to comply with the Community rules on state aid. However, special rules apply to aid for small and medium-siz~d enterprises, for employment and for regional· dev~lopment. In the transport sector, the ' attention of Member States has. been drawn to Community guidelines on State aid to the maritime and air transport industries.

In conclusion, the Commission· encourages Member States to apply for assistance under the Structural Funds or ad hoc Initiatives (notably for SMEs), or for securi~g approval of State aid.under the relevant guidelines laid down by the Commission.

2: A specific Community measure·

To the extent that existing Community ·instruments do not provide an adequate basis to resolve the short term, specific problems identified, an additional possibility could be .the creation of a. new and separate measure to provide specific, targeted support, alot1g similar lines to d~e 1992 Regulation on customs agents25. The aim of such an instrument. could be:

to provide specific, targeted support to those areas particularly dependent on duty frt.'l.'

sales in terms ofboth employment and income,

to contribute to the conversion of the most heavily affected enterprises in the 'sector with a view to maintaining jobs ~ough diversification (and creating altemative employment).

Any such proposal would need a clear assessment of the . potenthtl effectiv·eness and . value-added of these tpeasures, together with an identification of the scale ofthe problem

and. the target benefic~aries .. Jt ·.would also have: to:. be in 'line with the new financial ... '· persm~~tivesartcl comply,wi~·:the relevant:Community-rules (e.g. State Aids). ·. ,.:. ' ., ·.

25 See Chapter 1, p. 2 of this Communication.

14

7. Conclusnons

· ·• The Commission's analysis, corroborated by the estimates supplied by Member States, is. that the impaCt on employment of the abolition of intra~EU duty-free sales is likely to be time limited and specific in terms both of localities and sectors affected, with maritime activities (transport and .harbour ser_vices) being potentially the "most ·affected.

• ·On the other harid, analysis done by the Commission and confirmed by at least the only Member State who developed' such an apprpach is that the result of revenue recycling and sales re-location can well, in the medium term, lead to a net creation of jobs. . . .

• The Commission gives the highest priority to job· promotion. It considers that· the · effects on. others sectors (in particular, other modes of transport and ordinary retail) should also be taken into .account. In addition, the Commission believes that job promotion should be pursued through several coherent policy measures,. including· ·those - stressed by, the European Council ....:. aimed at making tax systems more employment-friendly by countering ham1ful tax competition: ..

·• The Commission therefore considers that an extension of the duty free arrangements would not efficiently address the fyPe of limited and specific employment problems it · h'a:s identified. It is too broad an instrument and it would aiso be relatively costly given th~ limited employment impact of abolition on~ the European economy .. Moreovt.·r. experience. has showry· that the continuation of duty -free arrangcn1cnis doc~ lllll

encourage commercia] operators to prepare for_ a new situation.

• To meetthe limited and specific employment effects that might arise, the Commission . considers ·that .the appropriate ~esponse is to use e~isting Community· instruinents d-escribed·. above. It therefore· urges Member States to exploit fully· all possibilities offered. within the current EC framework for ·structural Funds and in the future, framework (2000-2006) submitting specific funding proposals. .

• In addition, and if the. Council deems it.appropriate; there is :toom· for. developing a :. ,new measure to answer the l_imited and specific employment problems. identified, in

· _ the . form of a ,specially tailor~d Community financial measure· on ·which the :Commission would ·be ready to submit a proposal sholild the Council rcqtiCS~ it." .

/

15

ANNEX I

Table 1. Travellers'.-~dlowances applicable ~itliin EU travel

Alcoholic beverages Tobacco· products Perfume and Other goods toilet water

1 litre of spirits or 200 cigarettes; 50 gm of perfume; Total value of€ 90!1)

strong liqueurs over and-

22% by volume; or

' 100 cigarillos; 250 ml of toilet water. . or ..

or -2 litres of spirits with an alcoholic strength of not 50 cigars; more than 22% by volume;

or

( k" ·250 gm of smo mg 0~ ·tobacco. 2 litres of fortified wine ,.

and sparkling wines;

and I .,

2 litres of still wine.

(1) This value was mcreased from € 45 to € 90 from I Apnl1994.

Table 2. . Turnover generated by duty-free sales according to the dut)·-free sector (in € billion)

1991 1992 1993 1994 1995 - 1996 .. ..

Total duty-free sales 3.6 3.9 4.5 4.7 5.4 5.S

EU duty-free s~les -., - ·- - 3.7. 4.1 ' ... . .,.,._ ~.' ·.· ... . ... ·- . ~ ·•

·:,; Source: E~ropean Travel Research Jt'oui1dation2C•·

lb Sec limtnotc U ..

16

Table 3. · particular

·Turnover by the retail sector in general and the. dutY free seCtor in

-1993/95

'

Retail sector in total (€ billion)<'l 1361.1

Duty-free sector (€ billion) 4.1

Duty-free sales as% of total retail 0.3

Retail trade, Sales per ~mployee (€ 1 000)<'> 146

Duty-free, sales per '1ob supported by duty-free" 41 (€ 1 000)

' Duty-free sales as % of GDP 0.07

Source: The Commission on the basis of EUROST AT: .. '

Retailing in the European Economic Area 1997 (I) Extludtdg motor trade. . ..

' Table 4. Turnover by product group (in billion €)_

lntra-EU sales Bi~lion € ·%of total -. '

Alcohol (spirits and wine) 1.1 27

Tobacco· J 0.9 22 .

Fragrances and cosmetics 0.9 22

1\{iscellaneous 1.2 29

Source: European Travel Research Foundation27.

' . 27 See footnote 13 .•

17

ANNEX II

Data concerning employment provided by Mem~er States . .

In January 1999, Member- States replied to the Commission's request to provide information on the foreseeable employment effects · of implementing the Council's decision to abolish intra-EU duty-free sales. They did so ·in different ways, under different basic hypotheses. As a result, the data set is not completely comparable, although it does give a general picture.

From this data, it is evident that the level of-detail in the inform.ation varies from Member State to Member State. Some national administrations have not been able to provide substantiated figures on the possible employment effects.

However, as an indicator, the infom1ation obtained from national administrations ts

useful when assessing the employment impact of the 1991 and 1992 Council decisions. It appears to corroborate the view that the employment impact is not of macroeconomic importance. The information shows that there are likely to be adjustment problems, but it should be possible to counter these problems using Structural Funds. ·

The figures provided by Member States show that for each of them, the impact of the abolition ofintra-Comniunity duty-free sales is very limited. .

As a consequence of the various methods adopted by Member States to draw up this data, it is not possible to simply total the figures. Certain Member States chose to take- into account indirect effects (through unspecified extrapolations for _the impact on tourism etc.) while others looked at the duty-free sector in its entirety even thoug~ it would only be affected by the loss of the intra-Community part of these sales. Also, a few Member States included the net effect of revenue recycling. This latter aspect makesp it even more difficult to compare the 'potential overall impact.

-It should also be_ noted that certain Member States distanced themselves from the estimates because the analysis was carried out by the duty-free sales industry itself

Finally, looking at the estimates as summarised below, it is clear that most national administrations ,~xpect only a small indirect impact on employment. ·

/

18

Belgium:

No estimate provided. However, the Belgian administration noted that the abolition of du-ty-free sales is likely to have an im:pact on employment. (Source: Ministry of Finances)

Denmark:

1-800 jobs would be affected in the air and maritime sectors, but the tax income (some 1 billion Danish crone) -arising from the abolition of the tax exemption currently applicable to these. sales could make it possible to create 2 200 jobs. Denmark therefore

. mentions the creation of 400 jobs in the long term. · · (Source: Report of the Ministry ofTaxation- December 1997}

Germany:

For the.air sedor: 1 350 jobs would be directly affected . .:: ~or the maritime sector: 3 000 job losses would be in question from a total of 5 70()

jobs in the sector. (Source: Analysis based on sector studies carried out on behalf of the tax-free sale industry).

Greece: ·

The administration's overail analysis does not provide any estimate. However. they point . out that significant etp.ployment consequences are possible owing to the rise in· price of transport as well as a possible fall in tourism. (Source: Study by KPMG Peat Marwick for the EuropeanTravel Research Foundation:s - November'1997)

Spain: . . . . .

An overall figure of 22 406 job ·losses is provided. A rise in air transport charges, as well. as a fall in tourism would· result from the abolition ofthese sales .

. (Source: Ministry of Finance)

·- 211 Sec footnote IJ.

19

France:

The analysis is essentially aimed at the maritime sector and various production sectors. Northern Regions- areas of Calais and Brittany: Maritime companies: 1 500 envisaged job losses. Ports: 600 affected jobs. Commercial sectors: 2 500 jobs. Region of Cognac (production and commercial): 2 500 jobs; Other alcoholic product production areas (production and commercial): 290 job~; Perfume industry (production ariel commercial): 1 100 jobs; .Other industries (production and commercial): 900 jobs. (Source: Ministry for Economic Affairs, Finance and Industry- January 1999)

Ireland:

For the air sector: 466 jobs at risk~ For the maritime sector: 700 jobs at risls; .. Jndirectemployment losses (production etc) were not considered~ The budgetary impact of abolition is estimated at a. revenue gain of hctwccn 30 to·

45 million Irish pounds. . (Source: KPMG Study, on behalf of the Department of Finance- March 1998)

Italy did not provide any estimate, but significant losses of employment are mentioned in the air sector in view of the important turnover from intra-Community links ( 66% of sector turnover in 1998). (Source: Specific. survey by the Ministry of Finance)

Luxembourg:

Only the air sector would be concerned: 6 short-tcnn lays---off and 4 to 6 medium term lays-off are possible.

(Source: Ministry of Finance, based on information collected from the. industry).

The Netherlands: , '.

For direct jobs, the Netherlands considers that job losses could be between (lSI (industry estimate from the Benelux Duty-Free Association, July 1997) and· 3 258

. (industry esti~ate from ETRF29, October 1998) · For indirect jobs, job losses would_ range between· 362 (the industry estimate of July 1997) and 681 (the industry estimate of October 1998). However, in view of the source of this information, the national administration adv:ises a cautious approach to the estimates.

(Source: Ministry of Finance, based on estimates from the duty-free industry).

29 See footnote 13 ..

20

AllDst:fhn:

The air sector would be concerned: 250 job losses from 'a total of so·o jobs in _the sector.

(Source: Ministry of Finance)

Portugal:

The turnover of intra-EU duty-free sales represents aimost 70%. of the total· turnover. Taking a pessimistic view, the possible reduction of the activity in the duty.~ free sector could be arolind 57%.· ·

. (Source: Ministry of Finances, based oh the estimates ofthe duty-free industry)

F.inland:

For the air sector: 100 job losses should be feared. F~r the maritime sector: .

between 2. 500 and.3 000 jobs would be in. question on ttie ·Baltic. ·However, these . jobs will depend upon the operators' commercial strategy for connections via the. Aaland Islands (outside the Community tax territory); for the Gulf ofBothnia: 300 job losses could be foreseen. However, a Nation'al State aid measure (based ori a public service obligation) is being examined. 200 indirect jobs are also linked to the abolition ofthese sales.

(Source: Ministry ofFinanceJ . · ·

Sweden:

~ Sweden's reply is based on a study that it had carried out in March 1998 and the-effects on employmel!t are focused on the activities of ferries where job losses ·are estirilated between 500 and 1 200 posts. . . · . 500 further jobs would also be at risk but will depend upon the operator-S'. commercial strategy for connections via the Aaland Ishmds (outside the Community tax territory).· ... Regarding indirect effects, ric) structural effect is meniioned for retail sales, a ·limited effect is mentioned for tourism and a marginal effect on the price of lorry transport. Price increases for passenger transport on ferries would be about 15%. . (Source: . .Report oftb,e.Ministry of transport a~)d Cvmmunications-- March I 998.).

/

/

21

,The United Kingdom:

Direct job losses in duty-free outlets. at airports and on airlines, ferries. and Eurotunnel, would .be between 1 300 and 2 700.. . Indirect job losses on ferries, at ports and in the ,locaJ. economy would .be between 780 and 915. In addition, between 580 and 1 300 indirect jobs would also be lost, mainly in producer industries (tobacco~ alcohol and fragrances). . (Source: Study· by the. Department of the Environment~ Transport and the Regions.)

' .

\ • I •

22

ANNEX iii

· Co~mitments. remaining to be implemented - situation .as of 1 January 1999 for , selected Community Structural·Funds (CSF) objectives and Communitylnitiatives ·

·. (CI)0 '> . . - . . .

Current prices, 1999 . ,

Commitments remaining to be

·. implemented (in € million)

CSF . Objective I 18 596

pbjective 2. 4 336 .,

·. Objectives 3 and 4 .} 062

I

Objective 5b 2 594 -

' Objective 6 2!0 . -

CSF subtotal 28800 ---

CI INTERREG II.A 1 286 :

, SME· 418

ADAPT 645 '

-.-

ci subtotal 2349

TOTAL 31149 -Source: The Commrss10n. ( 1)- As obtained by deducting total iritplementation of commitments as on 1 January 1999 from total

. alloeations)994-: 1999 (after _reailocations made in 1998)'. - · · ' · · · ' · · ·

I •

23

·EN

' ,·

ISSN 0254-1475

COM(99) 65 final

DOCUMENTS

. 10 09 04 07

Catalogue number CB-C0-99-0SJ-EN-C

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